Displaying items by tag: banks

Over the last few years, Wall Street banks have been losing market share to private lenders. Recently, they have been looking to win back business by serving as intermediaries between private lenders and companies. 

Previously, leveraged buyouts were financed by a combination of high-yield bonds and/or leveraged loans, arranged by a major bank or group of banks. And this accounted for nearly a third of investment banking revenue on Wall Street.

However, private lenders have muscled in on this line of business, forcing banks to adopt and come up with their own strategies to remain viable. Banks like Wells Fargo and Barclays have partnered with private credit funds to source deals, advise lenders, and help companies navigate the right steps to secure financing. 

Banks also have preexisting relationships with many privately held companies. According to Barclays, private credit funds have $430 billion in uninvested capital. Since the 2008 financial crisis, banks have had more stringent capital requirements. This means it is more desirable to advise and provide services to borrowers rather than take on additional balance sheet risk. 

It’s also helping Wall Street banks get through a dry period for deals due to high interest rates, impeding M&A activity. They are able to collect fees from lenders and borrowers. Typically, direct lenders will split fees with the banks that originate the deal, between 25 and 75 basis points. 

Finsum: As private lending has displaced a major chunk of Wall Street’s investment banking revenue, banks are adapting by serving as intermediaries for private lenders and borrowers.  

In 2023, private credit funds managed $550 billion in assets and generated 12% in average returns for investors. Private credit has been ascendant the last couple of years and helped private equity firms find a new source of revenue. 

As public market financing become less available, direct lenders extended credit to small businesses and buyout deals, replacing syndicated loans and the high yield bond market. It resulted in private credit growing from less than $100 billion in 2013 to its current size.

This year, investment banks are once again stepping into the fray. So far, $8.3 billion of private market debt has been refinanced via syndicated loans, indicating that the high yield bond market in the US is once again a viable option for companies. In leveraged buyouts, banks are also competing as evidenced by JPMorgan’s financing of KKR’s purchase of Cotiviti, a healthcare tech company.

Spreads for syndicated loans and high yield bonds have dropped to thier lowest levles in 3 years. Rates are now between 200 and 300 basis points below what private credit lenders were offering in December. 

Private equity firms are expected to pivot into higher quality, asset-backed financing such as credit card debt and accounts receivables to replace revenue from private credit. They would also benefit from an improvement in public market sentiment and liquidity as they are sitting on a backlog of unsold investments in portfolio companies. 

Finsum: The private credit market has boomed over the last couple of years due to anemic public markets and hesitant banks. Now, banks are once again competing for business and offering more favorable terms.

According to analysis by S&P Global Market Intelligence, U.S. equity REITs have little direct exposure to Silicon Valley Bank, which had the second-largest bank failure in U.S. history. Office REIT Cousins Properties Inc. reported Silicon Valley Bank as its ninth-largest tenant by annualized rent as of 2022 year-end at just over $8.4 million, or roughly 1.2% of the REIT's total rental portfolio. The REIT leases 204,751 square feet of office space to the bank at its Hayden Ferry property in Tempe, Arizona. Boston Properties Inc. houses Silicon Valley Bank's Seattle office in its recently acquired Madison Centre property. In addition, Paramount Group Inc. leases office space to SVB Securities LLC, an entity under the SVB Financial Group umbrella, at 1301 Avenue of the Americas in Manhattan, N.Y. Alexandria Real Estate Equities Inc. reported in a March 13th news release that it has one lease with an affiliate of Silicon Valley Bank in the Greater Boston area market totaling 32,152 rentable square feet. The lease's annual rental revenue as of Dec. 31st, 2022, was $1.7 million, or 0.08% of the REIT's total annual rental revenue.

Finsum:According to S&P Global Market Intelligence, U.S. REITs had limited exposure to Silicon Valley Bank, with some REITS reporting that SVB made up a small percentage of their rental portfolios.

Concerns over the banking sector are currently making things rough in the $8 trillion agency mortgage bond market. Agency mortgage bonds are widely held by banks, bond funds, and insurers as they are backed by mortgage loans from government-controlled lenders Fannie Mae and Freddie Mac. They are far less likely to default than most debt. They are also easy to buy and sell quickly, which is why they were Silicon Valley Bank’s biggest investment before its troubles. However, agency mortgage bonds are vulnerable to rising interest rates like all long-term bonds. This pushed their prices down last year and also saddled banks such as Silicon Valley Bank. In fact, the risk premium on a widely followed Bloomberg index of agency MBS hit its highest level since October last week, as climbing interest rates led to volatile global markets. According to bond fund managers, this certainly reflected fears that other regional banks might have to sell their holdings. When benchmark interest rates rise, bonds that were sold at times of lower rates lose value. For instance, prices of low-coupon agency mortgage bonds started dropping about a year ago, when the Fed raised interest rates to tame inflation and also indicated that it might start selling the mortgage bonds that it owned.

Finsum:With faltering banks such as Silicon Valley Bank holding large amounts of agency mortgage bonds, the turmoil in the banking industry is roiling the $8 trillion agency mortgage bond market.

Bond volatility continued to explode last week due to growing contagion fears from U.S. banks. Last Monday, after a weekend in which the U.S. government intervened to protect depositors of Silicon Valley Bank and Signature Bank, the 2-year U.S. note yield experienced its biggest one-day fall since October 20th, 1987. Outside of U.S. hours, it dropped the most since 1982. That intraday drop of close to 60 basis points even exceeded the declines during the 2007-2009 financial crisis, the September 11th, 2001, terrorist attacks, and 1987’s Black Monday market crash. Gregory Staples, head of fixed income North America at DWS Group in New York told MarketWatch that the week’s decline in the 2-year U.S. yield came as the result of “de-risking of portfolios and draining of liquidity, stemming from concerns about the health of the U.S. banking system, exacerbated by questions about the future of Credit Suisse.” The ICE BofAML Move Index, which measures bond-market volatility, surged on Wednesday and Thursday to its highest levels since the fourth quarter of 2008, during the height of the Financial Crisis. Volatility then continued on Friday over concerns around First Republic Bank. This sent Treasury yields plunging, one day after they spiked on the news of a funding deal.

Finsum:Last week, the ICE BofAML Move Index, a measure of bond-market volatility, soared to its highest levels since the 2008 Financial Crisis as banking concerns continue.